Bet on Small-Dish Future Pays Off Big

4/21/2006 8:00 PM Eastern

By: Monica Hogan

It’s no secret Charlie Ergen likes to gamble. So it was only fitting that the chairman and CEO of EchoStar Communications Corp. chose Las Vegas as the backdrop to unveil the company’s Dish Network direct-broadcast satellite service 10 years ago.

“He presented himself as the boy next door introducing a new thing called DBS as if DirecTV [Inc.] didn’t exist,” said Buddy Davis, president of Waldorf, Md.-based satellite dealer Davis Antenna. EchoStar flipped the switch to turn on Dish service in front of hundreds of dealers at the Satellite Broadcasting & Communications Association show in March 1996.

“If you look at the history, Charlie started out like the rest of us, with a wing and a prayer,” Davis said. “He’s a true rags-to-riches story.”

During an on-air Charlie Chat with customers last month, Ergen and EchoStar executive vice president Jim DeFranco, who co-founded the company in 1980 with Ergen and his wife, Cantey, said they had bet the fate of the company on the move from the big-dish C-band business to DBS. The odds of failure were high for the EchoStar I satellite scheduled to launch in December 1995 from China, which was new to the space industry. Indeed, the Chat showed footage of the very next Chinese rocket exploding immediately upon launch. If that had been us, Ergen told the Charlie Chat audience, he might have had to go back to a job as a corporate accountant. “I’d be back selling wine,” DeFranco added.

At EchoStar headquarters in Colorado, employees who had gathered to watch the launch of Dish Network’s first satellite also had concerns about their futures.

“Nobody told us the Chinese do different countdowns than Americans,” said former Dish vice president of marketing Barbara Sullivan Roehrig, now a multichannel industry consultant and career coach for Denver-based BG Marketing Inc.

While a rocket typically blasts off at the count of one in the U.S., there was a four- or five-second delay at the EchoStar I launch for the Chinese countdown, Sullivan Roehrig explained.

“My heart stopped, along with probably 300 other people,” she said of the employees and their spouses and children who had gathered in an EchoStar warehouse to watch the live blastoff. “You could have heard a pin drop. It seemed it obviously was failing, and we all had bet our careers on this.”

Ten years later, it’s clear the risks paid off. EchoStar counted more than 12 million subscribers at the end of 2005, and the company was recently named the third-fastest-growing Fortune 500 company by Fortune magazine.

Although Ergen plays up his poker-playing, risk-taking persona on earnings calls and press conferences, he’s quick to add that he makes decisions based foremost on consumer demand. He and DeFranco learned early that they couldn’t make a high-volume business out of selling big-dish satellite systems at $20,000 per installation. So they decided to shift their resources to DBS, where the dishes were smaller and the promised higher volumes could lead to lower equipment costs.

“We knew early on they’d be launching a DBS business,” said Coleman Breland, executive vice president of sales and marketing for Turner Network Sales. “It was just a question of when the satellites would go up and when the set-top boxes would be ready.”

Breland, who started in the home satellite division of Turner, said the programmer knew Dish would be a serious player in the marketplace.

“In the early days of Dish, they were progressive with pricing and marketing,” Breland said. “They were smart.”

Through the years, Dish has tried to stay on message as the low-cost television provider. Davis admitted that EchoStar’s move to discounted satellite systems and installations didn’t appeal to dealers, but it was probably a natural way for the business to move.

Sullivan Roehrig recalled heated debates with Ergen over equipment pricing. “He wanted to give the dish away from the beginning,” she said.

Because DirecTV had launched the first true DBS service two years earlier and PrimeStar Inc. had its own small-dish offering, Dish had to establish a name for itself quickly and cheaply.

Sullivan Roehrig said the company chose the Dish brand because “we wanted to be generic, like Band-Aid, like Kleenex. We wanted everyone to think of us when they wanted to buy a satellite dish.”

With all the other corporate players circling the DBS industry in the mid-1990s, including DirecTV, U.S. Satellite Broadcasting, PrimeStar Partners, TCI Satellite, News Corp.’s American Sky Broadcasting Inc. and then-MCI Communications Corp., “you just didn’t expect [Ergen] to be the one to survive,” said Steve Blum, president of Tellus Venture Associates and a former executive with Dish competitor USSB, which was later folded into DirecTV.

In 1997, EchoStar signed a merger agreement with News Corp. chairman Rupert Murdoch’s ASkyB and MCI to form a DBS partnership that some industry players dubbed “DeathStar” for its potential to steal customers from cable, which had not yet made the move to digital. The deal disbanded and EchoStar walked away with additional DBS spectrum.

“If there was one big surprise in the past 10 years, that was it,” Blum said. “He basically ended up taking over two satellite positions.” By 2001, EchoStar had negotiated a deal with General Motors Corp. to take over DirecTV. A year later, after the merger failed to gain Federal Communications Commission approval, the deal fell apart. “If it wasn’t for the federal government, Charlie Ergen would have ended up holding all the marbles,” Blum said.

Instead, Murdoch’s News Corp. won controlling interest of DirecTV in late 2003. “That’s the main change in the business landscape over the past two years,” Leichtman Research Group Inc. president Bruce Leichtman said.

Dish subscriber additions are starting to flatten, not only from increasing competition from DirecTV, but also from cable operators’ bundled offers and to a lesser extent, competition from telephone companies entering the facilities-based video business.

“Another thing creating a different business environment [from 10 years ago] is the oversaturation of the market,” Leichtman said. “Over 85% of TV households have cable or satellite. It makes for very different business planning.”

With more consolidation brewing within the telecommunications industry, the media can’t help but speculate on whether EchoStar might make another run for the altar.

Davis, who was opposed to the DirecTV-EchoStar merger earlier this decade, said he believes “the government would protect the consumer” from any further attempts by the two companies to merge.

Some suggest competition from telephone companies entering the video market, EchoStar’s limited funding compared with larger corporate conglomerates, and satellite’s lack of a true broadband play could force Ergen to look to a partner to help EchoStar remain competitive.

“He’s less likely to make it through the next two or three years as an independent company than he was in the past two or three years; the deck is becoming increasingly stacked against him,” Blum said. But Ergen, he added, “has been playing against a stacked deck for over 25 years. I think he loves it.”

Some industry observers said it would be hard to imagine Ergen ceding control of EchoStar. A merger with a company that needed Ergen to remain in charge of the video side of the business might be feasible.

“A telco could potentially fall into that,” said TVPredictions.com president Phil Swann.

Ergen and his top executives insist that while they would not rule out attractive merger and acquisition opportunities, they’re more focused on the day-to-day responsibilities of providing value for their customers.

Dish provides most of its customer service through in-house call centers. At the beginning, Sullivan Roehrig said, all EchoStar directors had to spend an hour each week on the customer service phones to get a feel for the customer. “It was no ivory castle, unlike much of corporate America,” she added.

And especially during the early launch days, everyone at Dish was expected to work hard.

“We all worked six and seven days a week,” Sullivan Roehrig said. “It was a very charged, fun environment, incredibly stressful, with incredibly high expectations. It was a good stress for most people. We were a David and Goliath story.”

Michael Schwimmer, a former executive vice president of programming at Dish and now CEO of SíTV, said the hard work at EchoStar was “never a burden for me because my heart was in it.”

Schwimmer said one of the reasons he left the DBS company for SíTV was he wanted the chance to be CEO. “That wasn’t going to happen as long as Charlie Ergen was around,” Schwimmer said. “They didn’t need me in that role.”

Ergen “needs to be the boss,” said Swann. “It’s not necessarily a weakness. Some people are like that.”

Ergen said he would be willing to step down as head of EchoStar one day if someone else stepped up who could prove able to do a better job. Until then, many believe, he’ll keep a strong hand in all aspects of the operations.

“If Charlie ever does sell or retire, I think he’ll do it when he’s brought the company to a place where he’s satisfied with it,” Sullivan Roehrig said. “He’s not the type to leave with strings untied. He’s a perfectionist.”

Ergen is so closely associated with the EchoStar and Dish brands that he has his own TV show and cult following on Dish. Ergen and DeFranco keep in touch with their customer base through the monthly on-air “Charlie Chats,” which feature everything from programming updates to celebrity interviews to calls to action when EchoStar needs help getting its message across to Congress.

“It’s a great service,” Swann said of the Charlie Chat. “DirecTV should take a page from them. I hear more animosity from DirecTV customers who see DirecTV as a huge monolith of a corporation. Dish customers have more of a sense that they’re being listened to.”

In an e-mail exchange, HDNet LLC president Mark Cuban said appearing on the Charlie Chat was “more fun than Leno, except he didn’t have a bar cart.”

Over the years, EchoStar has tried a number of ways to create buzz for Dish, first with a DishMan spokescharacter, then with a long string of in-your-face, anti-cable ad campaigns, and late last year, a contest to rename a town Dish.

“It’s given us worldwide publicity,” Merritt said. “We want to grow our town. Developers have come to us specifically because of the deal and the notoriety.” He added he hopes to grow the town’s population of 111 to 50,000 by the end of the 10-year contract.

If the 10-year growth curve of its namesake is any indicator, such a lofty goal isn’t out of the question.